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A counter-example to an option pricing formula under transaction costs

Roux, A. and Zastawniak, T. (2006) A counter-example to an option pricing formula under transaction costs. Finance and Stochastics, 10 (4). pp. 575-578. ISSN 1432-1122

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In the paper by Melnikov and Petrachenko (Finance Stoch. 9: 141–149, 2005), a procedure is put forward for pricing and replicating an arbitrary European contingent claim in the binomial model with bid-ask spreads. We present a counter-example to show that the option pricing formula stated in that paper can in fact lead to arbitrage. This is related to the fact that under transaction costs a superreplicating strategy may be less expensive to set up than a strictly replicating one.

Item Type: Article
Institution: The University of York
Academic Units: The University of York > Mathematics (York)
Depositing User: York RAE Import
Date Deposited: 27 May 2009 09:53
Last Modified: 27 May 2009 09:53
Published Version: http://dx.doi.org/10.1007/s00780-006-0016-2
Status: Published
Publisher: Springer Verlag (Germany)
Identification Number: 10.1007/s00780-006-0016-2
URI: http://eprints.whiterose.ac.uk/id/eprint/6176

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